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November 13, 2012

3 Reforms of Money Market Funds Advanced by FSOC

Council, using authority under Dodd-Frank, votes unanimously on the proposals and seeks public comment

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The Financial Stability Oversight Council, a group of 10 regulators that includes SEC Chairwoman Mary Schapiro, voted unanimously on Tuesday to advance proposed changes to money market funds and was seeking public comment.

Using its authority under Section 120 of the Dodd-Frank Act, FSOC said it was proposing several alternatives for structural reforms to address the risks posed by money market funds.

After three commissioners at the Securities and Exchange Commission (SEC) would not go along with her plan to reform money market funds, Schapiro said the issue of money market fund reform “is too important to investors, to our economy and to taxpayers to put our head in the sand and wish it away." Money market funds’ "susceptibility to runs needs to be addressed. Other policymakers now have clarity that the SEC will not act to issue a money market fund reform proposal and can take this into account in deciding what steps should be taken to address this issue.”

The FSOC proposed three alternatives for consideration:

-- Alternative One: Floating Net Asset Value.Require MMFs to have a floating net asset value (“NAV”) per share by removing the special exemption that currently allows MMFs to utilize amortized cost accounting and/or penny rounding to maintain a stable NAV. The value of MMFs’ shares would not be fixed at $1 and would reflect the actual market value of the underlying portfolio holdings, consistent with the requirements that apply to all other mutual funds.

-- Alternative Two: Stable NAV with NAV Buffer and “Minimum Balance at Risk.”Require MMFs to have an NAV buffer with a tailored amount of assets of up to 1 percent to absorb day-to-day fluctuations in the value of the funds’ portfolio securities and allow the funds to maintain a stable NAV. The NAV buffer would have an appropriate transition period and could be raised through various methods. The NAV buffer would be paired with a requirement that 3 percent of a shareholder’s highest account value in excess of $100,000 during the previous 30 days–a minimum balance at risk (MBR)–be made available for redemption on a delayed basis. Most redemptions would be unaffected by this requirement, but redemptions of an investor’s MBR itself would be delayed for 30 days. In the event that an MMF suffers losses that exceed its NAV buffer, the losses would be borne first by the MBRs of shareholders who have recently redeemed, creating a disincentive to redeem and providing protection for shareholders who remain in the fund. These requirements would not apply to Treasury MMFs, and the MBR requirement would not apply to investors with account balances below $100,000.

-- Alternative Three: Stable NAV with NAV Buffer and Other Measures.Require MMFs to have a risk-based NAV buffer of 3% to provide explicit loss-absorption capacity that could be combined with other measures to enhance the effectiveness of the buffer and potentially increase the resiliency of MMFs. Other measures could include more stringent investment diversification requirements, increased minimum liquidity levels, and more robust disclosure requirements. The NAV buffer would have an appropriate transition period and could be raised through various methods. To the extent that it can be adequately demonstrated that more stringent investment diversification requirements, alone or in combination with other measures, complement the NAV buffer and further reduce the vulnerabilities of MMFs, the Council could include these measures in its final recommendation and would reduce the size of the NAV buffer required under this alternative accordingly.